You are on page 1of 8

Company name: Burelle SA Ticker: BUR:PAR Share price: EUR 317.5 (Market capitalization: EUR 588.

43 m) Price target (NAV per share): EUR 615.54 (+94% upside) Current P/E (TTM): 5.39

1) Introduction Burelle SA is a French holding company I ran across in a screener both for being cheap relative to book value and for having high returns on capital employed. Although almost all of the stocks that appeared in the results did not lead to anything meaningful, I think Burelle is an opportunity to buy a very good company at a cheap price. The company is majority owned by the Burelle family (77.85%) and its main asset is a 56.1% stake in Compagnie Plastic Omnium, a listed company with EUR 1.85 Bn in market cap founded by Pierre Burelle. Apart from that stake, Burelle also owns Sofiparc, a real estate company that brought in EUR 7.2 mm in rental income in 2012 and a private equity company whose NAV is estimated at EUR 35 mm. Taking into account the 3 pieces of the holding I estimate that the market cap is around 51.6% of the NAV as presented below.

2) Valuation: Sum of the parts 2.1 Compagnie Plastic Omnium (POM:PAR) Plastic Omnium is mainly a supplier of automotive parts (90% of revenue), although it also has a division engaged in environmental services in which they make waste containers and sell related services. It is the world leader in their two automotive divisions as well as in their environment division. Over the last 3 years it has averaged an impressive ROCE of around 26% with a current P/E of 10.64, which seems cheap for a company that has grown revenue in the same period at 25% CAGR. The main problem I have with it is that this is a cyclical company trading at close to 2x book value and will probably attract competition due to the hefty returns it is achieving. As the whole valuation of Burelle is related to Plastic Omnium, I will be doing a deeper analysis of Plastic Omnium in the next point. For the sake of this point, we will take the market value of the 56.1% stake: EUR 1035 MM. 2.2 Sofiparc

Sofiparc is the real estate part of the group founded in 1989, which had revenues from rents of EUR 7.2 MM in 2012. Sofiparcs main asset is a 13,000 sqm building in Levallois, a commune 6 km away from the city centre and close to La Dfense business district. This building is 80% rented by Compagnie Plastic Omnium. The company also owns 30,000 sqm of land in Lyon and Saint-Priest, 6000 of which are leased to a real estate fund operating two hotels (an Ibis and a Novotel) in Lyon and 6,000 sqm to McDonalds and a car washing company in Saint-Priest. The other 18,000 sqm in Saint-Priest are empty. The simplified balance sheet for Sofiparc looks like this: Thousands of euros
Goodwill Intangible assets Tangible assets Investment property Stocks Receivables and related accounts Other receivables Customer financing receivables * (C) Current accounts and other financial assets (D) Financial hedging instruments (E) Net cash * (A).

Sofiparc

54,313 22,544 521 536 45,848

TOTAL ASSETS
Loans and financial liabilities (B) Equity

123,762 53,174 70,588

The carrying value for the building and the land in Lyon is EUR 76.9 MM, which I think is somewhat undervalued taking into account that the EUR 7.2 MM made in rental income would make for a rental yield of 9.4%. I believe that it is quite a high yield, especially having a large part of the land unoccupied (18,000 sqm). In order to have another layer of safety I will take the book value of EUR 70.6 MM. 2.3 Burelle participations Its a small private equity firm which invests in French companies. It has a reported NAV of EUR 35 MM which will take as face value. 2.4 Estimated intrinsic value The total value of the three legs comes at EUR 1,140.6 MM compared to a market cap of just EUR 588.43 MM for a potential upside to NAV of 94%. Burelle doesnt have any debt at the parent level.

An investment in Burelle is basically an investment in Compagnie Plastic Omnium with a very big discount so I will take a look at that company to determine if it is worth an investment. I think the reasons that could explain why Burelle is so cheap could be: Holding company. Not much free float (77.85% in the Burelle familys hands and 5.53% in treasury stock). Annual reports in French only. European company It would not explain the discount with Compagnie Plastic Omnium. Related to the automotive industry - It would not explain the discount with Compagnie Plastic Omnium.

3) Compagnie Plastic Omnium: Is it worth it? Compagnie Plastic Omnium operates in two divisions: Automotive and Environment. The biggest and most profitable one is Automotive (90% of revenue), which is subdivided into: Inergy Automotive: It makes fuel systems, which are comprised of the fuel tank and the related components. Plastic Omnium Auto Exterior: It produces exterior components (read fenders, bumpers and tailgates).

On the other hand, the Environment division makes plastic containers and sells related services accounting for around 10% of sales. Its important to mention that the three subdivisions are the world leaders in their markets and while the Environment division deals primarily with local councils, the automotive division works with the best brands in the industry (see below).

Source: 2012 Financial results presentation.

Last week Plastic Omnium announced its results for 2012. These have been really good for the past 3 years, growing revenues from EUR 2,459 MM in 2009 to 4,806 MM in 2012 and

averaging a ROCE of around 26% in the same period. Net income has also increased from a weak EUR 28 MM in 2009 to EUR 181.5 MM last year.

Valuation metrics (2012 figures): Price/Earnings Price/Book Price/Owner's Earnings* EV/Normalized FCFF** Net Debt/Equity Net Debt/EBITDA Return on avg Equity Owner's Earnings on avg Eq EV Owner's earnings* Normalized FCFF** 10.64 2.22 8.11 8.82 47% 0.8 23.14% 29.01% EUR 2,162 MM EUR 227.6 MM EUR 251.33 MM

* Owners earnings are calculated excluding the amortization of customers relationships in business acquisitions and non-recurring items such as employee downsizing plans and impairments in assets held for sale. ** FCFF also excludes the non-recurring items and uses the depreciation as a proxy for the maintenance capex. As seen in the table below depreciation has been consistently higher than capex in the last years even in a period where the company was expanding. EUR MM Depreciation & amortization - Amortization intangibles Depreciation Capex 2011 185.71 17.04 168.67 170.23 2010 149.18 10.26 138.92 95.16 2009 172.04 65.20 106.84 68.47 2008 152.38 52.60 99.79 95.42 2007 150.84 50.52 100.32 121.13

The company looks somewhat expensive at 2.22x book value, although the great returns achieved in the capital employed makes the Price - to - Owners earnings look interesting at 7.87. An important thing to mention is that these results come with little debt. However, the key question is to determine if the company has a durable competitive advantage that allows it to earn an above average return. It is clear that the company operates in a cyclical industry as shown by the next chart, but it has also clearly outperformed the growth experienced by the industry by a wide margin, especially in the last 3 years.

Auto industry growth vs Plastic Omnium growth (2004 as the base year)
5 4 3 2 1 Number of vehicles Revenues

Net Income

0
2004 2005 2006 2007 2008 2009 2010 2011 2012 -1 -2

2012 2011 2010 2009 2008 2007 2006 2005 2004

Number of vehicles Revenue (EUR MM) Net income (EUR MM) 84,141,209 4806.2 173.4 79,989,155 4220.41 165 77,703,987 3249.6 140 61,791,868 2458.64 28 70,520,493 2696.54 -65 73,266,061 2685 49 69,222,975 2326 50 66,482,439 2054 44 64,496,220 1816 41

Source: International Organization of Motor Vehicle Manufacturers / The Companys annual reports.

If we have a look at the summary of the financial statements, we can observe that the return on tangible capital more than doubled the historical average in the last 3 years.
2012 (Press) 4806.2 0.00% 2011 (AR) 4220 614.1 14.55% 78.3 2010 (AR) 3249.6 494.1 15.20% 64 2009 (AR) 2458.6 329.1 13.39% 44.2 2008 (AR) 2696.5 311 11.53% 46 2007 (AR) 2685.1 342.9 12.77% 48.3 2006 (AR) 2325.6 326.7 14.05% 55.2 2005 (AR) 2054 294 14.31% 40.5 2004 (AR) 1816 284 15.64% 40

EUR MM Revenue Gross profit Gross margin net R&D

R&D % sales SG&A SG&A % sales Op profit Operating margin Other expenses EBIT EBIT margin Interest Taxes Net Income PPE Inventories Receivables payables

0.00% 0.00% 335.1 6.97% 46.1 289 6.01% 45.2 62.3 181.5

1.86% 239.4 5.67% 296.4 7.02% 24.9 271.5 6.43% 42.1 58.1 171.3 770.51 261.40 691.42 1079.21

1.97% 202 6.22% 227.2 6.99% 19.63 207.57 6.39% 27.2 29.7 150.67 672.87 273.34 586.89 899.84

1.80% 182.7 7.43% 102.11 4.15% 37.78 64.33 2.62% 25.1 8.2 31.03 526.97 206.05 432.63 671.97

1.71% 194.4 7.21% 70.72 2.62% 77.67 -6.95 -0.26% 50.51 5.76 -63.22 572.80 295.02 432.68 745.56

1.80% 193.5 7.21% 101.16 3.77% 11.99 89.17 3.32% 36.4 1.77 51 614.08 293.29 596.43 856.30

2.37% 171.6 7.38% 99.89 4.30% 20.19 79.7 3.43% 25.7 3.9 50.1 581.91 251.42 457.47 770.10

1.97% 163.5 7.96% 90 4.38% 19.5 70.5 3.43% 16.3 10.1 44.1 543.04 198.21 393.05 639.27

2.20% 163.7 9.01% 80.5 4.43% 3.93 76.57 4.22% 19.15 2.1 55.32 510.49 218.42 390.32 636.41

CE ROTC Sales/CE ~27%

644 29.51% 6.55

633 22.95% 5.13

494 9.12% 4.98

555 -0.88% 4.86

648 9.64% 4.15

521 10.71% 4.47

495 9.97% 4.15

483 11.10% 3.76

The reason for this outperformance is the reorganization plan started in the second half of 2008, during a very difficult period for the industry. Under that plan, Plastic Omnium reduced 100 MM in overhead costs and decreased the workforce by 21% excluding the BRICs. As can be seen in the financial statements above, the SG&A has decreased from 7.43% of revenues in 2009 to 5.67% in 2011. At the same time, the company has invested heavily in emerging markets and America where returns have been significantly better.

Revenue by geographic region

The future for Plastic Omnium looks rosy as the automotive industry is expected to grow 4.7% annually until 2016 where BRICs will represent 70% of total growth (source: IHS Oct. 2012).

In order to capture a fair share of that growth the company will invest EUR 1.2 Bn in the next four years. In 2013 alone it will build 6 plants in China and one in Russia. On top of that, there is some untapped growth in the industry due to the replacing of metal with plastic in the BRICs.

Souce: Plastic Omnium Car Density (Number of vehicles per 1,000 people)

4) Conclusion I like Compagnie Plastic Omnium very much but I wouldnt buy it directly at current levels. In my opinion, the company seems fully valued and I dont have enough margin of safety; any

margin of safety for that matter. Getting exposure through Burelle is an entirely different matter.

The market cap of Burelle is around 51.6% of NAV, being most of the NAV the stake the company holds in Compagnie Plastic Omnium. If Burelle were to divest its non-core assets (Sofiparc and Burelle participations) and return the money to shareholders, Burelle would be a pure investment in Compagnie Plastic Omnium trading at 44% of its market price. At those levels you would be buying a company whose ROCE is 26-27% below book value. Plastic Omnium seems to be a very well managed company which I think has much to do with its family-controlled situation. They recovered very fast from the 2008-09 slump in the industry by cutting costs aggressively and investing in emerging markets, where the returns on invested capital were - and are - much more attractive. Often in France it is not politically correct to cut jobs domestically and expand overseas but management did a very good job executing the plan that was best for shareholders. In addition, Plastic Omnium is a very focused company, with a narrow range of products that appeal to some of the best car manufacturers in the world. It is also the largest player in its three lines of businesses, a factor that should allow it to extract economies of scale with the thin gross margins the industry operates. Overall, I believe Burelle provides an excellent opportunity to invest in a quality company at a below market price. Disclosure: Long Burelle SA.

You might also like